Velan Inc. (VLN) Earnings Call Transcript & Summary

Good morning. My name is Joelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the conference call. [Operator Instructions] Mr. Rishi Sharma, you may begin your conference.

Thank you, operator. Good morning, and thank you for joining us on our conference call. Happy New Year to all. [Foreign Language]. Today, in addition to our third quarter results, we will also discuss 2 important transactions that position Velan for sustainable long-term growth, improve our balance sheet and unlock significant value for our shareholders, namely the divestiture of our asbestos-related liabilities and negotiations for the sale of our French subsidiaries. Given the latter, our French businesses have been reclassified as assets held for sale and discontinued operations in our financial statements. Our discussion of operating results will essentially focus on continuing operations unless otherwise specified. Let's start by discussing the disclaimer from our related Investor Relations presentation, which is available on our website in the Investor Relations section. As usual, the first section mentions that the presentation provides an analysis of our consolidated results for the third quarter ended November 30, 2024. The Board of Directors approved these results yesterday, January 14, 2025. The second paragraph refers to non-IFRS and supplementary financial measures, which are defined and reconciled at the end of the presentation. The last paragraph refers to forward-looking information, which is subject to risks and uncertainties that are not guaranteed to occur. Forward-looking statements contained in this presentation are expressly qualified by this cautionary statement. Finally, all amounts are expressed in U.S. dollars unless indicated otherwise. I now turn the call over to Jim Mannebach, Chairman of the Board and CEO.

Thank you, Rishi. Good morning, afternoon or evening to everyone. It's good to speak with you again. We have many important developments to share with you today. Not only did we report very strong third quarter results last evening, but earlier this morning, we announced 2 important strategic initiatives, the divestiture of our asbestos-related liabilities and negotiations for the sale of our French subsidiaries. We believe these initiatives will unlock significant value for our shareholders, while further reducing Velan's operating and financial risks as well as strengthening our balance sheet. I'll begin with the review of the quarter and then go over the strategic initiatives. Please turn to Slide 4 for a general overview of the third quarter. As expected, Velan maintained its growth momentum with strong top line and bottom line results in the quarter. Sales from continuing operations grew more than 18%, as we executed on our solid and diversified backlog. We also delivered a significant improvement in profitability with adjusted net income from continuing operations of $8.5 million, driven by a favorable mix, efficiency gains and better absorption compared to a $7 million loss a year ago. At the 9 months, Velan has achieved adjusted net income of $11.9 million from continuing operations. This compares to a loss of $14.7 million a year ago. We also generated significant cash flow from operations of nearly $20 million after 9 months. Clearly, the measures implemented to improve cash flow generation, including leveraging the global scale of our business, maximizing strategic procurement and optimizing our inventory are paying off. The cash flow will enable us to invest in key growth opportunities for the business going forward. Moving to Slide 5. Our order backlog reached nearly $300 million at the end of third quarter, up 5.3% since the beginning of the fiscal year, as new bookings continue to exceed shipments during that time. At quarter end, over 83% of the backlog, representing orders of some $249 million, are deliverable within the next 12 months. Bookings meanwhile totaled $59.1 million versus $60.1 million last year. The slight reduction mostly reflects factors impacting the timing of our orders. You might recall that we had very strong booking activity in the first half of the fiscal year. And importantly, the award of certain large projects targeted by our Italian operations have been delayed and are now expected in Q4 of this year. On the other hand, we recorded very high bookings from our MRO business in North America and oil refinery projects in Germany, as we continue to expand our market penetration globally. Now let's turn to the strategic initiatives on Slide 6. I'm very happy to announce that we've entered into an agreement with an affiliate, Global Risk Capital, a well-established long-term liability management company specializing in the acquisition and management of legacy corporate liabilities for the divestiture of our asbestos-related liabilities. To provide some background, many of you know that 2 of our subsidiaries, U.S. subsidiaries are named as defendants in several pending litigations. Claimants are seeking to recover damages for personal injury allegedly caused by exposure to asbestos-containing products manufactured and sold in the past. The transaction will permanently remove all asbestos-related liabilities and obligations from the company and will indemnify us against all legacy liabilities. The strategic rationale for the transaction is rather straightforward. First, it derisks Velan from potential asbestos claims. Second, it allows management to focus on generating long-term profitable growth through investments in its operations, free of asbestos-related distractions. Let's move to Slide 7 for the second initiative. We've entered exclusive negotiations with Framatome, an international leader in nuclear energy, for the sale of our French subsidiaries, Segault and Velan France, and a transaction value and total consideration to our company of EUR 192.5 million. Now in accordance with French law, the Segault, Velan France and Framatome must inform and consult their employee representative bodies before a definitive agreement is entered into between the parties. When the definitive agreement has been signed, a meeting of Velan's shareholders will also be called to approve the transaction. I'm pleased to report our controlling shareholder, Velan Holding has already pledged its support in favor of the transaction. Strategically, we view this transaction as a win-win for all parties. If you recall, French authorities had halted the Velan merger proposal in October of 2023 due to national defense interest. As the proposed transaction will be with a strong French partner, it meets the important consideration for the French government of preserving sovereignty over their assets. As for Velan, the French government's position limited our strategic options. The transaction frees us from these strategic constraints and enables us to offer a more compelling value creation proposition for our shareholders. Upon successful completion of the 2 transactions, Velan will remain the leader in flow control solutions for clean energy and various industrial markets, driven by a strong brand, high-quality products and superior market positioning. Over 75 years, we built a solid reputation for custom designing complex solutions for demanding applications. And we're looking forward to further expansion of our global leading market positions. Our activities will continue to benefit from robust momentum that we've all seen in the nuclear space throughout the world, while remaining firmly entrenched in other markets that prize our ability to create and provide the very best solutions to the most demanding flow control applications. As you know, we're well positioned for the multiyear nuclear power growth cycle with our proprietary valve offering for small modular reactors or SMRs along with our global installed base of valves that exist in nuclear reactors. Velan has been actively involved in the nuclear space for more than 50 years, and we continue to gather growing momentum, as reflected by recently announced exclusive agreements and other alliances signed with the world's leading players in nuclear power, including GEH, Westinghouse, Bruce Power and CANDU, from which we expect to generate significant order intake well into the future. In other energy-related markets such as oil and gas and LNG, we continue to benefit from global transition trends, as customers move worldwide to reach their own net zero objectives. Here also, we have a wide market penetration with a customer base spanning approximately 90% of North America's oil refineries and a growing presence throughout the world. Finally, Velan continues to grow its position in nonenergy-related industries that prize our ability to excel in the most demanding of applications throughout the world. To wrap up on Slide 9, Velan's strong momentum continued in the third quarter. Key performance indicators keep pointing in the right direction. So we remain confident of delivering sales growth from our continuing operations for the full year, along with enhanced profitability. Longer term, our interwoven goals consist of maximizing profitable growth and rewarding our shareholders. The company continues to explore strategic options, all of which are focused on increasing shareholder value. Today's announcement will help us to achieve these goals, proving our commitment to create lasting value for our shareholders. Rishi, I'll turn it over to you for comments on the financial outlook and progress through the quarter and the fiscal year-to-date.

Thank you, Jim. Our consolidated financial statements prepared in accordance with IFRS show, in the context of the transactions, a loss from continuing operations of $47.8 million for the quarter and $50.6 million after 9 months. I draw your attention to the restructuring expenses of $74.5 million for the quarter and $81.3 million year-to-date, representing adjustments, which related primarily to the accelerated accretion of the asbestos-related provision to account for the expected settlement and transaction-related costs. Further details are available in our MD&A and financial statements. With that said, I'll begin by providing more color on our third quarter results from a continuing operations perspective. So please turn to Slide 11. Sales totaled $73.4 million, up 18.1% over last year. This growth was mainly driven by increased shipments from our activities in Italy and China. These factors were partially offset by lower sales in other international markets, while sales from our North American operations remained relatively stable. By customer geographic location, North America remained our principal market, accounting for approximately 55% of sales. Asia Pacific was our second largest revenue-generating region with 44% of sales driven by several projects in the energy and petrochemical sectors. Gross profit rose significantly to $28.3 million versus $8.2 million last year. This sharp increase was primarily due to higher sales volume, which positively impacted the absorption of fixed production overhead costs, a more favorable product mix compared to last year, reduced exposure to an onerous contract that negatively affected last year's gross profit and efficiency gains across our operations. As a percentage of sales, gross profit reached 38.6% compared to 13.1% last year. Administration costs totaled $17 million or 23.2% of sales compared to $15.5 million or 24.9% of sales a year ago. The year-over-year increase reflects higher sales commissions due to greater business volume, higher freight costs and the impact of the significant increase in our share price of the company's long-term incentive plan. Turning to Slide 12. Adjusted EBITDA amounted to $14.3 million compared to negative $4.1 million last year. The solid year-over-year improvement was driven by higher sales and improved gross profit. As a result of higher adjusted EBITDA, Velan achieved an impressive turnaround in net profitability with an adjusted net income of $8.5 million or $0.39 per share compared to an adjusted net loss of $7 million or $0.32 per share last year. Turning to Slide 13, strong performance has been sustained since the start of the year, as after 9 months, we have achieved 19.5% sales growth, gross profit more than doubled and adjusted net income reached $11.9 million as opposed to an adjusted loss of $14.7 million last year. Our improved profitability also yielded a solid cash flow from operations of $19.9 million after 9 months compared to a negative cash outflow of $7.6 million a year ago. Our financial position remains solid. As of November 30, 2024, the company held cash and cash equivalents of $35.1 million. Long-term debt, including the current portion, amounted to $19.5 million at the end of the quarter and bank indebtedness stood at $3 million. Finally, given Velan's improved financial performance, the Board reinstated the dividend payment and declared a dividend of CAD 0.03 payable before February 28, 2025, to the shareholders of record as of February 14, 2025. The Board also confirmed its intent to review the company's dividend policy after the closing of the transactions, as Jim previously commented on, and to which I will now turn my attention. Moving to Slide 14 to discuss the implications of the transactions on our financial statements. The divestiture of the asbestos liability would involve selling our U.S. subsidiary, Velan Valve Corporation, which will have been previously capitalized to $143 million from Velan and $7 million from the buyer in exchange for an indemnity against the claims. We plan to fund our share by using our available cash on hand, credit facilities, and partial proceeds from the sale of French -- from the French subsidiaries or alternative financing options. As for our U.S. activities, we will continue to service this important market under a newly created subsidiary, which will retain the Velan brand. The divestiture will leave the asbestos provision from our balance sheet and absolve Velan of all asbestos-related liabilities. Turning to Slide 15. The sale of our French subsidiaries, the selling price consisting of a cash payment of EUR 170 million and the forgiveness of an intra-group loan of EUR 22.5 million for a total consideration of EUR 192.5 million. Our subsidiaries' total sales for the 12-month period ended November 30, 2024, was $98 million, representing approximately 25% of total revenues for the period and their combined backlog at the end of November was $218.6 million. Therefore, Velan's sales from continuing operations on a trailing 12-month basis stand at $293 million, while excluding orders from the French subsidiaries, our backlog was $298.7 million as at November 30, 2024. Turning to the balance sheet. Considering net cash proceeds of approximately $30 million to $32 million from the 2 transactions will leave us with a pro forma cash balance and cash equivalents of approximately $65 million as at November 30, 2024. In summary, on Slide 16, we believe these transactions are key to unlocking significant value for Velan's shareholders. With a strong financial position, we will have the ability to optimize capital allocation by striking the right balance between investing in growth opportunities and returning funds to shareholders. Looking ahead to the fourth quarter, we are ideally positioned to deliver on our sales growth expectations for the year. Based on current orders, we anticipate concluding fiscal 2025 with an increase in sales from continuing operations. I would now like to turn the call over to the operator for the Q&A session.

[Operator Instructions] Your first question comes from Alex Ciarnelli with SM Investors.

Congratulations. So on the [indiscernible] the transaction, assuming everything goes according to plan, when do you think it will close?

So in answer to your question, French law notwithstanding, we're obviously always keenly intent on making certain that we provide a good future for our employees. And under French law, there is a consultation period by our works councils in the 2 operations in France. Under the law, they have a 30-day period to consider and consult, and then that can be extended an additional 30 days. I would expect though, all things considered, that we're looking probably close to the end of our fiscal year or early first quarter of next year for the transactions to fully close. So that's roughly the time line that we're looking at.

Okay. Perfect. And then while the French business -- I did some math. I think it was around 25% of the business or, let's say, $90 million, $100 million of revenue. Would I be crazy to think that EBITDA will be around $10 million and thus, the multiple will be a pretty high multiple. Would it be crazy thinking that or I mean in the ballpark?

So you need to look at both transactions at the same time. So you see our continuing operations, as we mentioned, on net earnings and EBITDA adjusted, what that means. And for what remains, you need to consider that we would no longer have the legal burden for the defense cost in our EBITDA, net income, and any changes to the long-term provision. So that's gone as well. So if you look kind of at where we are TTM on EBITDA, excluding France, it's, I'd say, in the mid-20s.

The mid-20s, that's for the 9 months, right, EBITDA?

It's TTM.

Oh, TTM, mid-20s, so that's ex France, right?

Yes.

Okay. What else do I have here? Well, then I'll ask you, since I don't really have it here, do you have the TTM with France? Well, I guess what I can ask is the depreciation and amortization, I think, it was for the year, $10 million to $12 million. Of that, would it be fine to think that 20%, 25% is related to the French subsidiary?

Yes, I would think so. I mean if you look at the asset base. Yes.

Okay. I'll do the math after, but in any case, if I understand correctly, what you're saying, my multiple is too high, so it has to come down on the transaction. Because again, just doing without going back, just doing the back of the envelope math, I get a 25 multiple, which is pretty high. So that's what I was trying to figure out if I'm completely crazy or there's some basis there?

When you say 25 multiple, you're referring to what the French transaction?

French transaction, yes, I think that's what he's talking about.

Yes, just the French subsidiary.

Yes, we don't -- I think that I don't know about whether you're completely crazy. But we don't disclose profitability in the individual units, we never have, and so I think directionally, we can say that, as I mentioned in my comments, it was a win-win for both. From our side, as I said, it generates a good bit of cash for us and frees our consideration of other strategic options from our French employees. They're partnering with one of the strongest companies in France. And I think it also meets the objectives of the French state. We believe that the national security interests were very, very high. Importantly, for us, too, as we look beyond after closing the transaction, as I mentioned, Velan maintains a very, very strong position globally in the nuclear space with alliances and long-term relationships with all of the key OEs and EPCs globally. So we're very, very confident of our future going forward. And I think, as I said, repeating myself, it's a win-win outcome for everyone.

These are both great outcomes. Do you disclose or would you disclose what the percentage, let's say, of continuing operation revenues now will be from nuclear for you guys, which I guess is the North America -- well, the world...

We haven't disclosed by industry segment. We continue to disclose by the geography. The MD&A includes a look at our sales on a destination basis globally. Yes.

I missed the last part, sorry.